Will Obama Cause Another Bubble?

“The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit,” says the Washington Post, and some people fear that will lead to another housing bubble. In fact, there are going to be more housing bubbles; the Obama administration is contributing to them; but not through policies promoting subprime lending.

Neither subprime lending nor other federal policies caused the housing crisis that led to the 2008 financial crisis. Too few people understand this because they still view U.S. housing as a single market. But unlike labor or food or cars, housing is not something that you can easily pick up and move to somewhere that may place a higher value on it. Oil can be easily and fairly cheaply transported, so there is a world oil market; but housing markets are strictly local.

Nearly eight years ago, Alan Greenspan famously said the United States was not suffering from a housing bubble. He has take a lot of heat for that, but he was right. His exact words were, “Although a ‘bubble’ in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.”

WHere he went wrong was when he added, “Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications.” The reason he and so many others misjudged the markets is that, in the past, the rises and falls of local housing markets have not been synchronized, and so a fall in one tended to be offset by a rise in another.

But during the mid-2000s, the fall of the “frothy” markets were nearly synchronized, and I think the reason for this is that this was the first time so many markets were subject to the land-use regulation that increased market volatility. The rapid rise in housing prices in so many markets led far more speculators to jump in, especially after the dot-com crash, and that infusion of money made the markets act more closely together.

As the Antiplanner has noted before, if subprime lending had caused a national housing bubble, you would have seen bubbles in places like Dallas, Houston, Indianapolis, and Raleigh–places that had no bubbles even though they were growing much faster than regions that did bubble. The difference between frothy California and flat Texas is that one had land-use regulation that artificially restricted housing supply while the other did not.

I estimate that about 45 percent of American housing was under land-use restrictions that contributed to the 2006 housing bubbles. This was a huge increase from the 1970s, when only about 10 percent of U.S. housing bubbled, and the 1980s, when less than 20 percent of housing bubbled (and not all simultaneously).

If the Obama administration has its way, next time it will be closer to 90 percent. The administration’s sustainable communities partnership would like to see all metropolitan areas do the kind of land-use restrictions that led to three housing bubbles in California and Hawaii, two in Massachusetts, Oregon, and Washington, and one in Florida. This program, not subprime lending, will make the next financial crisis even worse than the last one.